The General Anti-Abuse Rule (GAAR) Advisory Panel have published details of an opinion on film-related trading losses and arrangements for the sale of an LLP member’s Capital Account finding that the arrangements were not a reasonable course of action.

The GAAR is structured in the form of a “double-reasonable test”:

  • It bites if arrangements “cannot reasonably be regarded as a reasonable course of action”. 
  • Where the GAAR applies, Penalties of up to 60% of the counteracted tax can be levied in addition to any penalties due under the normal rules. 

The taxpayer was a member of a limited liability film partnership (LLP) which used member capital contributions, funded by a UK bank, to enter into a sale and leaseback arrangement with a film studio.

  • The arrangements created a large loss in the LLP and the taxpayer claimed loss relief against his other income.
  • Some years later the LLP members entered into arrangements which split the sale of their LLP capital accounts from the sale of their residual interests in the partnership.
  • The taxpayer sold his LLP capital account for market value. The purchaser acquired the economic benefit of the taxpayer’s future LLP drawings, but the taxpayer retained the legal entitlement to both the drawings and to his LLP interest. The taxpayer’s LLP interest was sold to a different purchaser for £1.

The panel found that the splitting of the capital accounts was contrived and abnormal and the method by which the taxpayer exited the LLP could be for no other reason than to secure a tax advantage. The entering into and carrying out of the scheme did not amount to a reasonable course of action in relation to the relevant income tax provisions.

Links to our guides

General Anti-Abuse Rule – GAAR (subscriber version)

Partnerships: tracker: changes to tax rules 

External link

GAAR Advisory Panel opinion of 25 January 2019: Individuals claiming relief for film related losses and split sale of interest in partnership

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